Thursday, October 25, 2012

Fight between Santander and Barclays' analysts shows bank capital meaningless

As reported by the Telegraph, Santander sees a report by Barclays analysts suggesting it might need to raise 18+ billion euros of new capital as inaccurate.

Because Santander does not provide ultra transparency and disclose on an ongoing basis its current global asset, liability and off-balance sheet exposure details, your humble blogger has no way of knowing if Santander or the Barclays analysts are right.

Capital is an accounting construct.  To know who is right, you have to know the current market value of Santander's assets so that you can compare it to the book value of these assets and make an adjustment to Santander's reported book capital levels.

What is clear though is a fight like this is not a ringing endorsement for bank capital as being meaningful.
Santander has dismissed as “inaccurate” a research report by Barclays analysts that warned the Spanish lender could need to raise nearly €18bn (£14.7bn) in new capital. 
The Barclays report, entitled Capital doesn’t add up, claimed that Santander’s domestic Spanish business has a capital-loss buffer about one-fifth the size stated by the bank’s accounts. 
“While Santander reports a 10pc core Tier 1 ratio for its Spanish business, it’s more like 2pc based on the capital that is actually available to absorb domestic losses. This suggests a €15bn to €18bn capital deficit in Spain,” wrote Barclays analyst, Rohith Chandra-Rajan. 
Mr Chandra-Rajan argued that Santander’s accounts “overstate” the ability of its Spanish business to absorb losses by including capital that is effectively locked up in foreign subsidiaries. He claimed that capital would be unavailable to the parent company should it be hit by new losses in its domestic operations.
Barclays estimated that Santander’s Spanish business has just €5.1bn in core Tier 1 capital, equivalent to a core capital ratio for its domestic operations of 2.3pc, below the minimum threshold of 9pc. 
Responding to the claims, a spokesman for Santander said the Barclays report used faulty methodology and that its conclusions were wrong. 
“Besides using incorrect figures, this exercise assigns a value of zero to the units outside of Spain, which are owned by the Spanish parent and worth considerably more than zero,” he said. “Deducting subsidiaries’ capital from the Group’s figures to calculate a figure for Spain does not work because of differing local definitions of capital and reporting criteria from country to country.” 
The spokesman added that Santander had passed recent European stress tests.
Passing a European stress test is not a ringing endorsement of capital adequacy.  The history of these tests as shown by a couple of Irish banks and Dexia is that banks still fail shortly after passing the tests.

In addition, there is a legitimate question about how much capital the parent can get from the subsidiaries in the form of dividends or by selling its ownership interest.

From another Telegraph article,
Santander, the eurozone's biggest bank, said nine-month net profit fell by two thirds to €1.8bn (£1.4bn), hit by writedowns on bad property investments made during Spain's decade-long housing boom. 
The bank said on Thursday it had completed 90pc of government-enforced writedowns on repossessed housing and unrecoverable loans to developers after writing off €5bn (£4bn) in losses.
Why not 100%?
The bank said it had also increased provisions against loan defaults in Spain to €9.5bn during the nine months to end-September, giving it a coverage of 70pc.
Why not 100%?
Rising bad loans in Spain have spread beyond the real estate sector as more Spaniards default on their debts in a crippling recession, with a quarter of the workforce out of a job. 
Bad loans hit record highs in August..... 
Santander has been tarnished by its home country's woes as investors fret about the future of a banking sector which is being recapitalised due to a €100bn European credit line. 
The bank passed an independent audit of the sector with flying colours and a massive capital surplus in September and will not receive funds from the bailout. 
Yet credit ratings agency Moody's rates the bank just two notches above junk - although one rank higher than the sovereign. 
Not a ringing endorsement of Santander's capital adequacy.

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